The Q-Theory in the German housing market

The paper analyses housing investment patterns in 127 German cities with annual data from 1990 to 2010. The empirical estimation is conducted with a panel analysis based on Tobinís Q theory, which says that any investment is a function of the Q ratio. Our marginal Q ratio captures the price-relation between resale and new dwellings, as well as the relation of dwelling rents between old and new houses. Q is higher, with higher dwelling stock prices and with higher rents for new constructed dwelling units. With a higher Q, more investments are to be expected, which are measured with dwelling permits and dwelling starts. The results of the fixed effect model show that Tobinís Q explains up to 20 percent of the variation in dwelling investments. Individual regressions yield great differences across cities in respect to the coefficients of determination. We therefore run and discuss several correction methods and alternative investment measures by integrating additional data on population and adjacent communities. These controls and modifications can improve the models substantially, but the differences across communities remain unchanged.